U.S. stocks to rise next week with earnings on tap

NickGodt

NEW YORK (MarketWatch) -- Stocks are seen climbing to further highs next week, as the market turns to the kick-off of earnings season, and hopes abound that with an upbeat September jobs report and Wall Street write-downs the worst of this summer's credit crisis is finally past.

"From the market's perspective, now the economy is OK, which will allow earnings to be OK as well," said Paul Nolte, director of investments at Hinsdale Associates. "The market is turning any news into good news at this point."

The first week of the fourth quarter ended as it had started, with stocks rallying to record highs. On Monday, the Dow Jones Industrial Average
DJIA, +0.26%
surged 190 points after banking giant Citigroup Inc.
C, -1.00%
revealed the extent of its credit-market pain so far: Earnings will be 60%, or $3.3 billion, below the year-earlier quarter.

But after a summer rocked by global fear of a credit crunch, Wall Street welcomed the reduced uncertainty over the impact of the crisis, and began to assume that much of the bad news already has been priced in.

On Friday, the market got another gift: The September employment report showed an as-expected gain of 110,000 payrolls, and perhaps more importantly, an upward revision of the previous month's tally.

The August jobs report had initially showed an unexpected decrease of 4,000 payrolls but after the revision, payrolls rose by 89,000 instead. See full story.

The Dow ended 91 points higher on the day, after hitting a record intraday high of 14,124, and finished with a weekly gain of 1.2%.

The S&P 500 Index
SPX, +0.27%
rose 14 points to 1,557, also after hitting an all-time high of 1,561.91 earlier on. The broad index finished with a gain of 2% for the week.

The best gains were seen for the tech-heavy Nasdaq Composite Index
COMP, +0.42%
which rose 46 points to 2,780 on Friday, and rallied 2.9% for the week.

Reconciling with the Fed

The market had been in rally mode after the original August jobs loss convinced the market that the Federal Reserve would start cutting interest rates, fearing the impact of the slumping housing market and the credit crisis on the broad economy. The Fed delivered a hefty 50 basis-point rate cut on September 18.

But after the latest jobs report, market expectations that the Fed will cut rates again in October have fallen below 50%. For Nolte, the market now has "gotten itself into a box," with reduced hopes of further stimulus coming from the central bank while the economy and earnings are sluggish.

For bulls, such as Cantor Fitzgerald market strategist Marc Pado, "we got lower rates and a modest growth economy," he wrote in a note. "It doesn't get any better than that."

Investors will still eagerly await the minutes of the Fed's September meeting, to be released on Tuesday, for any hints about the thinking of Fed officials on future changes in rates.

Relevant economic data will come Friday, when producer prices and retail-sales figures for September are released.

"I would be surprised if we don't have more rate cuts," said Owen Fitzpatrick, head of U.S. equities at Deutsche Bank. "There was growing concern that things were slowing much more, and one job report is not going to change that.

'We've seen all the big write-offs from the financial sector, but it will be the consumer that's going to be challenged going forward, so we'll need more stimulus for the economy.'
Owen Fitzpatrick, Deutsche Bank

"We've seen all the big write-offs from the financial sector, but it will be the consumer that's going to be challenged going forward, so we'll need more stimulus for the economy," he added.

Earnings on tap

But the market may pay more attention to retail-related companies such as Yum Brands Inc.
YUM, -0.46%
which reports on Monday, Costco Wholesale Corp.
COST, +0.48%
on Wednesday and PepsiCo Inc.
PEP, +1.60%
and Safeway Inc.
SWY, +0.00%
on Thursday.

Also on Thursday, regional bank M&T Bank Corp.
MTB, -0.46%
may provide more insight into the impact of the credit crisis.

Prior to that, on Wednesday, Monsanto Co.
MON, +0.08%
will provide a window into global growth, when it reports on sales of its agricultural products, while India's Infosys Technologies Ltd.
INFY, +0.27%
will showcase how the technology sector is faring.

"If the market continues to rally, that would be led by tech, which are much more global and don't need much financing," said Hinsdale's Nolte.

On Friday, Research In Motion Ltd.
RIMM
shares climbed about 13% after the BlackBerry maker doubled its bottom line in its second quarter. See full story.

Overall earnings growth is expected to be sluggish. According to Thomson Financial, earnings at S&P 500 companies are expected to grow 3.9% in the third quarter, down from expectations for growth of 6.2% on July 1. Most of the downward revisions have affected financials and the consumer-discretionary sector, led by the home builders.

But many in the market still hope that global growth will not be affected by the U.S. slowdown and that many U.S. companies will benefit from a weaker dollar, which makes exports cheaper and boosts repatriated profits.

"Global growth is still a valid point to make," said Hinsdale's Nolte. "The large-cap multinational companies have done well, and they certainly have done better than the financials."

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